My 2014 Value Stock Picks

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 |  Includes: HMN, MUR, TDW
by: Brad Kenagy

This is second article of my two-part series where I look for the best picks for 2014. In a recent article by a fellow author, one of the readers who commented on the article talked about how the author had some stock picks that had big runs this year, and that owning stocks that have had big runs was not a good strategy. I then commented on that a strategy should be based on your investment objectives rather than just a bad or good vote. In my last article, I covered growth stocks and for this article I will focus on my top 3 value stock picks for 2014,

For my search, I decided to use the suite of Pure Value ETFs because of the unique selection process used to select the underlying holdings. The table below from Guggenheim shows that the pure value ETFs only select the stocks, which are truly value stocks where as traditional value ETFs have a grey area where a stock could be considered both value and growth.

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Screening Process

I will be covering my top pick from each of the three pure value ETFs covering large, mid, and small cap stocks.

Step 1: Export holdings for each value ETF into a spreadsheet.

Step 2: Copy those holdings into the Finviz.com stock screener.

Step 3: Use the following screener criteria to screen stocks until roughly 10% of each ETFs holdings remain.

  • EPS Growth This Year: Positive
  • EPS Growth Next Year: Positive
  • EPS Growth Next 5 Years: Positive
  • PEG Ratio: < 2
  • Profit Margin: >5%
  • Price/Sales [P/S]: <10
  • Performance YTD: Up
  • Dividend Yield: >1%

Step 4: To value each stock on my final list I will be using a DCF calculator, with data for earnings and growth coming from Zacks.com, benchmark data from longrundata.com, and CPI data from the BLS. I used the following assumptions for the calculator:

  • Earnings grow for next: 5 years
  • Growth Levels off: to 1% after
  • Benchmark return: 10 yr annualized SPY return of 7.30%+1.20% inflation= 8.50% benchmark

Step 5: After step 4 is performed, I will highlight the three stocks [1 for each market cap segment] in more depth.

Large Cap Value

The ETF I used for this selection was the Guggenheim S&P 500 Pure Value ETF (NYSEARCA:RPV), which currently has 110 holdings. I copy and pasted the list of ticker symbols for the holdings of RPV into the Finviz screener, and used the criteria in step 3 above and ended up with 10 stocks that met those criteria. Based on my DCF calculations the company that is currently the most undervalued is Murphy Oil (NYSE:MUR). In the table below are the results of my DCF calculations for each stock that made my final list of large cap value stocks.

Symbol

Company

EPS

LT Growth Est

Fair Value

Current Price

% Undervalued

GS

Goldman Sachs Group Inc

16.47

6.32%

277.91

174.88

58.91%

LNC

Lincoln National Corp

4.73

9.57%

91.26

51.25

78.07%

LYB

LyondellBasell Industries Cl A

5.80

10.53%

116.36

78

49.18%

M

Macys

3.79

11.00%

77.5

52.45

47.76%

MUR

Murphy Oil Corp

6.24

13.00%

138.27

64.46

114.51%

PFG

Principal Financial Group Inc

3.42

13.47%

77.21

48.28

59.92%

RTN

Raytheon Co

6.31

9.34%

120.61

88.61

36.11%

STT

State Street Corp

4.50

10.53%

90.28

70.98

27.19%

UNM

Unum Group

3.29

8.50%

60.76

34.35

76.89%

WFC

Wells Fargo & Co

3.80

8.94%

71.45

45.12

58.36%

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Murphy Oil

Two major factors will lead Tidewater to realize its fair value. The first is increased oil production and exploration from the onshore and offshore fields that Murphy Oil is producing oil & gas from. The second factor is share repurchases and debt reduction from its spin-off of Murphy USA (NYSE:MUSA).

  • Oil & Gas Production: In the most recent earnings report, Murphy oil noted that the amount of oil it produced worldwide increased 14.17% compared to the same quarter last year. Murphy Oil stated, "Higher oil volume produced in the 2013 quarter was mostly attributable to the Eagle Ford Shale area, where an active development drilling operation is ongoing with eight rigs. Crude oil production also increased in both Canada and Malaysia." Looking at the Eagle Ford Shale area, which was the biggest driver for the increased production of Murphy Oil, the chart below from a recent investor presentation, shows that Murphy Oil is projected to reach its peak production in its base Eagle Ford acreage until between 2016 and 2017. Also, the chart shows that production for 2013 is currently just under 40K BOEPD, and at its peak between 2016-2018 is expected to be between 60K-70K BOEPD, which is roughly a 60% increase in production from current levels. Going forward the projected increased production not just in the Eagle Ford, but worldwide, I believe will move Murphy Oil much higher from current levels.

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  • Share Repurchases & Debt Reduction: In a recent investor presentation, Murphy Oil noted that they had $250 million left on its current share repurchase plan, which represents just over 2% of current shares outstanding. This is not a large amount but with the increased oil & gas production I would expect Murphy Oil to start a new share repurchase program when its current one ends. Secondly, Murphy Oil recently completed the spin-off of Murphy USA that was the gasoline products and convenience store merchandise segment of Murphy Oil. In the last earnings report, it was noted that Murphy USA paid Murphy Oil a $650 million cash-dividend. Murphy Oil used part of the dividend to pay down just over 15% of its long-term debt.

Mid Cap Value

The ETF I used for this selection was the Guggenheim S&P MidCap 400 Pure Value ETF (NYSEARCA:RFV), which currently has 95 holdings. I copy and pasted the list of ticker symbols for the holdings of RFV into the Finviz screener, and used the criteria in step 3 above and ended up with 9 stocks that met those criteria. Based on my DCF calculations the company that is currently the most undervalued is Tidewater (NYSE:TDW). In the table below are the results of my DCF calculations for each stock that made my final list of mid cap value stocks.

Symbol

Company

EPS

LT Growth Est

Fair Value

Current Price

% Undervalued

AFG

American Financial Group Inc

3.61

8.00%

65.31

55.87

16.90%

HCC

HCC Insurance Holdings Inc

3.94

8.50%

72.76

45.41

60.23%

KMPR

Kemper Corp

1.90

10.00%

37.31

40.25

-7.30%

PL

Protective Life Corp

3.81

9.77%

74.11

50.13

47.84%

RCII

Rent-A-Center Inc

2.94

6.50%

49.98

33.37

49.78%

RKT

Rock-Tenn Co Cl A

7.29

11.92%

154.7

102

51.67%

SPN

Superior Energy Services Inc

1.75

13.15%

39.01

25.21

54.74%

TDW

Tidewater Inc

3.39

37.40%

185.05

54.96

236.70%

TRN

Trinity Industries Inc

4.14

10.00%

81.29

54.63

48.80%

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Tidewater

Two major factors will lead Tidewater to realize its fair value. The first is increased offshore oil & gas rigs, which Tidewater provides vessels that support rig operations, including transportation of supplies, rig crews, towing services, and rig construction services. The second factor is increasing day rates for deepwater drilling rigs, because of the changes in technology, which are allowing companies to drill in deeper water than ever before.

  • Increased Rigs: Below is a chart from a recent investor presentation, which shows the number of working oil & gas rigs is at an all-time high, and Tidewater having the largest fleet of vessels to support those rigs is well positioned to take advantage of this trend.

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  • Increased Deepwater Day Rates: The chart below shows deepwater day rates have increased significantly over the last two-years from just over $20,000/day to a current rate of just over $31,000/day. To capitalize on the increased number of deepwater rigs, Tidewater currently has 23 new deepwater vessels under construction, and are set to be delivered over the next 3 years.

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Small Cap Value

The ETF I used for this selection was the Guggenheim S&P SmallCap 600 Pure Value ETF (NYSEARCA:RZV), which currently has 150 holdings. I copy and pasted the list of ticker symbols for the holdings of RZV into the Finviz screener, and used the criteria in step 3 above and ended up with 4 stocks that met those criteria. Based on my DCF calculations the company that is currently the most undervalued is Horace Mann Educators (NYSE:HMN). In the table below are the results of my DCF calculations for each stock that made my final list of small cap value stocks.

Symbol

Company

EPS

LT Growth Est

Fair Value

Current Price

% Undervalued

HMN

Horace Mann Educators Corp

2.20

8.00%

39.8

30.3

31.35%

KALU

Kaiser Aluminum Corporation

3.49

15.15%

84.21

68.56

22.83%

POWL

Powell Industries

2.94

8.00%

53.19

66.24

-19.70%

UFCS

United Fire Group

1.64

10.00%

32.2

27.69

16.29%

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Horace Mann Educators

The major factor that will lead Horace Mann to realize its fair value is continued growth in the teacher & administrator market. Horace Mann core business is providing K-12 Educators and administrators with Life, Auto, Property, and Annuities. In addition, Horace Mann has a well-covered 2.50% dividend yield, which is a decent amount above the current dividend yield of 1.80% for the SPDR S&P 500 (NYSEARCA:SPY).

  • Teacher & Administrators: According to a recent investor presentation, the teacher and administrator market "is projected to grow by 14% by 2020." With this potential growth in its core market Horace Mann is well positioned with its portfolio of insurance products to capture this growth. In addition, to current teachers & administrators, Horace Mann still has other potential markets within the education sector, for instance former teachers and teachers at private schools.

Closing Thoughts

In closing, I believe all three of the stocks I found are quality value stocks, which are undervalued, and have strong underlying trends that will continue to support their stocks in 2014. In addition, I believe the final lists for each market cap segment are a good place to start to find quality value names based how you value a stock because not every person values a stock the same way.

Disclaimer

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.